AT&T Wireless 2014 Annual Report Download - page 37

AT&T INC. | 35
principal payments. Likewise, periodically we enter into
interest rate locks to partially hedge the risk of increases
in the benchmark interest rate during the period leading
up to the probable issuance of fixed-rate debt. We expect
gains or losses in our cross-currency swaps and interest
rate locks to offset the losses and gains in the financial
instruments they hedge.
Following are our interest rate derivatives subject to
material interest rate risk as of December 31, 2014.
The interest rates illustrated below refer to the average
rates we expect to pay based on current and implied
forward rates and the average rates we expect to receive
based on derivative contracts. The notional amount is the
principal amount of the debt subject to the interest rate
swap contracts. The fair value asset (liability) represents
the amount we would receive (pay) if we had exited the
contracts as of December 31, 2014.
Interest Rate Risk
The majority of our financial instruments are medium- and
long-term fixed-rate notes and debentures. Changes in
interest rates can lead to significant fluctuations in the
fair value of these instruments. The principal amounts
by expected maturity, average interest rate and fair value
of our liabilities that are exposed to interest rate risk
are described in Notes 9 and 10. In managing interest
expense, we control our mix of fixed and floating rate debt,
principally through the use of interest rate swaps. We have
established interest rate risk limits that we closely monitor
by measuring interest rate sensitivities in our debt and
interest rate derivatives portfolios.
All our foreign-denominated long-term debt has been
swapped from fixed-rate or floating-rate foreign currencies
to fixed-rate U.S. dollars at issuance through cross-currency
swaps, removing interest rate risk and foreign currency
exchange risk associated with the underlying interest and
Maturity
Fair Value
2015 2016 2017 2018 2019 Thereafter Total 12/31/14
Interest Rate Derivatives
Interest Rate Swaps:
Receive Fixed/Pay Variable Notional
Amount Maturing $1,000 $ — $ 700 $1,500 $3,350 $ — $6,550 $157
Weighted-Average Variable Rate Payable1 2.4% 3.4% 4.2% 4.9% 4.2% —
Weighted-Average Fixed Rate Receivable 4.1% 4.2% 4.2% 4.5% 3.5% —
1 Interest payable based on current and implied forward rates for One, Three, or Six Month LIBOR plus a spread ranging between approximately 4 and 425 basis points.
In anticipation of other foreign currency-denominated
transactions, we often enter into foreign exchange forward
contracts to provide currency at a fixed rate. Our policy
is to measure the risk of adverse currency fluctuations
by calculating the potential dollar losses resulting from
changes in exchange rates that have a reasonable
probability of occurring. We cover the exposure that
results from changes that exceed acceptable amounts.
For the purpose of assessing specific risks, we use a
sensitivity analysis to determine the effects that market
risk exposures may have on the fair value of our financial
instruments and results of operations. To perform the
sensitivity analysis, we assess the risk of loss in fair values
from the effect of a hypothetical 10% depreciation of the
U.S. dollar against foreign currencies from the prevailing
foreign currency exchange rates, assuming no change in
interest rates. We had no foreign exchange forward
contracts outstanding at December 31, 2014.
Foreign Exchange Risk
We are exposed to foreign currency exchange risk through
our foreign affiliates and equity investments in foreign
companies. We do not hedge foreign currency translation
risk in the net assets and income we report from these
sources. However, we do hedge a portion of the exchange
risk involved in anticipation of highly probable foreign
currency-denominated transactions and cash flow streams,
such as those related to issuing foreign-denominated debt,
receiving dividends from foreign investments, and other
receipts and disbursements.
Through cross-currency swaps, all our foreign-denominated
debt has been swapped from fixed-rate or floating-rate
foreign currencies to fixed-rate U.S. dollars at issuance,
removing interest rate risk and foreign currency exchange
risk associated with the underlying interest and principal
payments. We expect gains or losses in our cross-currency
swaps to offset the losses and gains in the financial
instruments they hedge.